One of the biggest question marks in investing over the last 10 years will be what happens to retail in the online age. I have been following Norstrom’s off and on over the last 20 years as it is a high quality retailer with dedicated family management. However, in the last few years I have been out of Nordstrom’s as I have been avoiding retail all together until more clarity as to the future of retail is visible to me.
One of the statistics that most impressed me about Nordstroms was it was growing it’s web presence at something like 20% a year for the last few years. It seemed to be one of the few retailers that has a good online strategy, and is keeping itself Amazon-proof.
However, that may be a curse in disguise. As per this article on Business insider, this expanding retail presence is causing a problem, with digital sales now accounting for 30% of Nordstrom’s sales.
So they may be successfully fighting off Amazon (for now) – but it is clear they are cannibalizing their in store sales. Online sales grew 20%, while overall sales grew around 3%.
Is this bad? In Nordstrom’s case, I am now changing my mind, and I think this is a sign of trouble. In my opinion, Nordstrom has differentiated itself by having premium stores, and excellent customer service. Translating this differentiation to the web is a whole new challenge, other than the oft mentioned ease of returning things to Nordstrom. Competing for a premium experience on the web is going to be difficult, especially with Amazon and other competitors (i.e. upstart Stitchfix) building a model around personalization.
My prediction is that Nordstrom’s will have to reduce their average store size, as it probably no longer makes sense to have the same level of inventory in store when people are increasingly buying online. If this is the case, I think the cost of shrinking and retrofitting stores will exceed the (assumedly) reduced rent cost for the next few years, all the while spending to fight off online competitors.
So while I think Nordstrom’s is still a great brand and premium shopping experience, I am staying away. I think the moves the company needs to make in the future may further cloud how brick and mortar retailing needs to change in order to survive in an online world.